The Bible is a go-to source for many topics. Economics usually isn’t one of them. But this past Sunday, at Catholic Mass, I found a bit of unexpected policy inspiration from history’s most well-read book.
Jesus was a Keynesian.
Let me explain. The passage of interest was the popular story of the loaves and the fish. For the unfamiliar, a quick recap: A huge crowd follows Jesus into a remote region, whereupon it gets late and they get hungry. The catch is that no one has any food, save a small boy with five loaves of bread and two fish. Rather than send the people to fend for themselves, Jesus blesses the provisions and has his disciples distribute them to the masses. When all is said and done, 5,000 men (plus uncounted women and children) are fed, with twelve wicker baskets full of leftovers.
The incredible nature of the feat is what captures people’s attention. But behind the literals, there’s a basic theme that can be applied to economic policy: a well-timed stimulus can have outsized impacts on well-being. This is exactly what happened with President Obama’s 2009 Recovery Act. Let’s call it the miracle of fiscal multipliers.
What’s a Fiscal Multiplier, Anyway?
At this point, you may be thinking, “Loaves and fish are great, but wasn’t the Obama stimulus pretty controversial?” With some conservatives still complaining, you’d be forgiven for thinking the stimulus jury is still out. It’s not.
Just last week, a panel of top economists polled by the University of Chicago labeled the Recovery Act a resounding success. All but one of the thirty-seven respondents agreed, or strongly agreed, that the stimulus lowered unemployment. And twenty-five said the benefits were greater than the cost. Just two disagreed. (Ten were uncertain.)
That’s about as close to a consensus as you’ll get in the policy world—and this among a group whose collective writings could well comprise a “bible of economics.”
Okay, fine. But what the heck are fiscal multipliers? How does this all work?
In economics as in physics, actions cause reactions. Systems, whether physical or financial, are interdependent, and feedback loops can amplify or attenuate the effects of a catalyst. It’s like throwing a pebble into a pond: there are ripples. Consequently, when the government increases spending or reduces taxes, it can have an economic impact larger than the dollar cost of the stimulus alone.
Consider this example. Bob is hungry but penniless, so he goes to his rich Uncle Sam, who gives him $10 to buy a sandwich from Dan’s Deli. Then the magic happens. Deli Dan, who is good with meat but not with scissors, uses $8 to get a haircut from Harry. Haircut Harry celebrates his new customer by getting a $6.40 cab ride from Cary, who then treats herself to a $5.12 latte at Larry’s.
This process can go on and on. At each step, the seller spends 80 percent of his income and saves the rest. That is, each person has a marginal propensity to consume of 0.8. If the sell-buy cycle continues indefinitely, Uncle Sam’s original $10 will have generated $50 in economic activity. In other words, the fiscal multiplier is 5.
Fiscal Multipliers: a Keynesian Staple
Of course, the real world is more complicated. Economists have spent decades debating the size of fiscal multipliers and there are still important areas of disagreement.
Classical economists contend that multipliers are nonexistent or close to zero, on grounds that prices increase in response to government purchases and that, in any case, forward-looking individuals will know that higher government spending now will mean more taxes later, and so will reduce their spending commensurately.
On the other hand, economists who subscribe to the school of thought advanced by John Maynard Keynes believe multipliers can be large, especially under the right conditions.
In their view, prices and wages are rigid and adjust slowly to changes in government demand, leaving room for powerful multipliers, which will be especially large in situations where the beneficiaries are poor or credit-constrained (because such individuals spend most of what they receive).
Monetary policy also plays a key role. If the central bank fears government stimulus will stoke inflation and raises interest rates in response, it can largely erase any multiplicative effects.
But accommodative monetary policy is another story.
Indeed, the best evidence for big multipliers comes from research conducted by Michael Woodford, Gauti Eggertson, and others during the past decade. If the central bank reduces interest rates to their zero lower bound in response to a severe recession— a so-called “liquidity trap”—government can increase spending without worrying about courting inflation or crowding out private borrowing.
In other words, fiscal policy is most effective precisely when it is most needed.
Fiscal Multipliers in Action: Stimulus Act Edition
Pumping up our economy through fiscal multipliers is exactly what happened with the American Recovery and Reinvestment Act, which was signed by President Obama in early 2009.
The stimulus act increased cumulative GDP by an estimated $0.3 trillion to $1.5 trillion between 2009 and 2013, according to the Congressional Budget Office. If we take the average of these estimates, the benefit of the stimulus ($0.9 trillion) about equals its $0.8 billion cost, suggesting a fiscal multiplier of about 1.1. If we use the upper end of the range, the implied multiplier is 1.8. Fiscal policy played a key role in the recovery.
Analysis by the White House Council of Economic Advisers (CEA) reaches a similar conclusion. Including the impact of subsequent fiscal measures (like the payroll tax cut and the extension of unemployment insurance), the stimulus increased GDP by a cumulative $1.5 trillion while creating or saving 8.8 million jobs.
These are not small numbers.
According to CEA, the types of spending with the largest multipliers (about 1.5) are infrastructure investments and safety net spending. Incidentally, these are also the categories that address our two most pressing economic problems.
And this accounting may miss the act’s most important legacy: reducing long-term unemployment. If the stimulus helped prevent the skills erosion that comes with dormant labor, we will continue to reap its benefits—in terms of higher labor force productivity—for years to come.
Fiscal Multipliers in Action: Safety Net Edition
These results are not specific to the stimulus act.
The Department of Agriculture’s Economic Research Service has found the multiplier for food stamps to be 1.8, meaning that every $100 spent on food stamps creates $180 in economic activity. Not a bad bang for your buck, especially when you consider that buck is keeping kids from going to bed hungry.
Similarly, research conducted for the Department of Labor estimated the multiplier for unemployment insurance to be 2.0. Neither of these findings are surprising: when you give money to people who need it, they spend it—improving not only their own welfare, but also boosting the incomes of their neighbors.
Fiscal Multipliers in Action: Loaves and Fishes Edition
Going back to the loaves and the fish, we can think of Jesus as the government and the hungry crowd as an economy in a recession. If we allow that the story’s timespan is not a single meal, but a full business cycle, we can watch multipliers work their magic. Five loaves and two fish is enough to feed a few people, who can use their newfound energy to bake more bread and catch more fish, feeding others. When the harvest’s recipients do likewise, the virtuous cycle of sharing propagates. The impossible suddenly becomes tractable—while remaining every bit as miraculous.
Too often, we see assistance to the needy is seen as a public cost with private benefits. But fiscal multipliers show us there is more to the story. A bit of unselfishness can bring a bounty of collective well-being.
Whether it’s loaves, fish, or food stamps, the miracle of giving is that it makes you realize you had more than you thought.